Eric,
Your questions are the same ones I had. What I did was to create a login on the free site
www.box.net. You can upload pictures to this site, then select the "Share this file" button which gives you the direct link for the specific picture. You then use that in a post by selecting the "URL" button at the top of the message box.
The message will have the link for people to click on, which pulls up your picture, in a different window.
I still don't know how people embed pictures into the actual post, but I would suspect that embedding it is not the preferred method by Julie. I would say that it would use up a lot of memory space on the website's server.
Anyway, hopefully this will help.